Saturday, August 31, 2013
Wall Street Journal Tax Report: Income Tricks Under Fire by Laura Saunders:
The IRS has won its second clear victory in
three years over a tax-cutting maneuver available to—and used
by—millions of small-business owners.
In 2010, an Iowa federal court slapped down a popular move in which
small-business owners underpay themselves in order to minimize Social
Security and Medicare taxes, while taking compensation in other ways [David E. Watson P.C. v. United States, No. 4:08-cv-442 (S.D. Iowa Dec. 23, 2010)]. On
appeal, the Eighth Circuit affirmed the decision [David E. Watson, P.C. v. United States, No. 11-1589 (8th Cir. Feb. 21, 2012)].
Earlier this month, the U.S. Tax Court sided with the agency in the
case of Sean McAlary Ltd. Inc. v. Commissioner [T.C. Summ. Op. 2013-62 (Aug. 12, 2013)]. It ruled that a
Subchapter S firm whose sole owner was Mr. McAlary, a California
real-estate broker, should have paid him $83,200 in wages for 2006.
Instead, he was paid zero. ...
This issue is a perennial one, although it has become more important as payroll taxes have risen. "There's a constant push and pull between small-business owners
wanting their wages to be as low as possible and the IRS wanting them
high," says Jeffrey Porter, a certified public accountant in Huntington,
W.Va., with many small-business clients
The court ruled that the firm owed nearly $13,700 in payroll and
unemployment taxes, plus more than $4,300 in penalties, for that year.
Prior TaxProf Blog coverage: